Impact of US Sanction and Surge in Oil Price in the Indian Economy

India is the third largest importer of oil. More than 80% of its oil requirement is imported each year. Hence, it’s one of the most vulnerable economies to surge in oil price. High oil prices are definitely a risk to India’s fiscal health. USA has stopped issuing waivers that previously allowed India to purchase Iranian Oil. This gave India no choice but look at other alternatives to import oil. India is anticipating that the surge in oil price may convert into inflation and largely impact the Indian economy and its people.

Dharmendra Pradhan, India’s Petroleum and Natural Gas Minister recently expressed that India plans to procure additional oil supplies from other oil producing countries to make up for the loss of Iranian oil supply. Donald Trump’s Iran sanctions are intended towards reducing its power in Yemen, Syria and other Middle Eastern countries and towards suppressing its ballistic and nuclear missile program. However, Indian economy is likely to suffer quite a blow.

At a Carnegie Endowment event, Harsh Vardhan Shringla, the ambassador said that President Donald Trump’s efforts to sink Iran’s oil exports to zero would have a direct impact on India, the largest buyer of oil after China.

A large number of the nation’s oil refineries have been attuned to process oil imported from Iran. All of a sudden India cannot convert the refineries or make alterations to them to process another crude oil form. India has had long and healthy cultural and business relations with Iran. Cutting down oil sales from Iran raises a number of questions with respect to the long-term agreements about the quality and pricing in the crude oil business.

Christopher Wood, Equity Strategist, and the Managing Director at CLSA expressed that higher oil prices are the biggest risk for the Indian equity scenario on a five-year view. The surge in oil price could lead to fiscal deficits, substantially high net capital outflows and currency depreciation, and cause an upward pressure to inflation.

If the crude oil prices go over $75 per barrel, India’s macroeconomic position will be quite impacted. As per the economists of Nomura, every increase of $10 per barrel will expand India’s Current Account Deficit by 0.4% of GDP. As per CARE Ratings, an increase in crude oil prices may also result in RBI postponing a rate cut in the June bimonthly committee meeting. It also said that higher oil prices could put pressure on the Rupee value. With an increase in oil price in the range of $70 to $75 per barrel or more can reduce the Rupee value by 3 to 4%.

Analysts have anticipated that rising oil prices shall hurt the profit margins of Indian Companies amidst rising expectations of a revival in earnings. Vice-President at ICICI Securities Ltd, Vinod Karki said that a surge in oil prices would not only impact the Indian Economy on a macro level, it is also going to impact India micro-economically. The micro earnings will be largely impacted because demand will be impacted.

The stock markets of India are expected to face a lot of pressure as a result of higher crude oil prices. A number of Indian companies depend on stable crude oil prices such as refining companies, tire companies, footwear companies, airline companies, and lubricant companies. The profitability of these companies will be adversely affected because of the increase in input costs. This will also negatively influence their stock prices. However, oil exploration companies could benefit from an increase in oil prices.

Increase in crude oil prices will affect the raw material supply chain of a large number of manufacturing companies because India imports a major percentage of their crude requirement. The operating margins will be affected because of higher input costs and the impact on demand. This extent of the rise in prices will be passed on to the end users or consumers. Some of the companies will face the additional weight of freight cost.

Overall the surge in oil prices is expected to disturb India’s fiscal math, burden the current account deficit, lead to inflation and impact the Sensex and the stock market. Increasing crude oil prices will definitely be a key challenge for the new government. However, the negative impacts will only materialize if the oil prices continue to sustain at elevated levels.